PM Summer Doldrums 4

With gold, silver, and their miners' stocks drifting listlessly near correction
lows, the sentiment in precious-metals land is even more pessimistic than usual.
Bears abound while bulls are now an endangered species. But interestingly,
demoralizing consolidations are par for the course this time of year. Throughout
most of their secular bull, the precious metals have suffered during the summer
doldrums.

Back in the era of wind-powered tall ships, the doldrums were the name given
to the areas of the oceans near the equator where prevailing winds often didn't
exist. These periods of dead calm meant there was no wind for sails, trapping
ships for days or even weeks. Many years ago I thought this was a great analogy
for how PMs feel in the summer. They drift lethargically and all hope for progress
vanishes.

The ironic thing is even though this phenomenon happens nearly every summer like
clockwork, it always crushes sentiment. The great majority of traders aren't
disciplined enough to study the markets and learn their rhythms, so each year
the PM summer doldrums discourage them anew. It is amusing in a way, but also
sad since the resulting poor sentiment bleeds everywhere eroding the resolve
of all PM traders.

The best way to combat this irrational bearishness is to understand why it
happens and how it tends to look in terms of prices. Naturally gold is the
key to the entire precious-metals realm, silver and the PM stocks merely follow
its lead. The reason gold prices slump to a long seasonal ebb in summer is
because this metal's primary driver, global investment demand, is very uneven
across a typical calendar year.

While worldwide gold demand sees big spikes in autumn, winter, and spring
for various income-cycle and cultural reasons, there are simply none during
the summer. If you are not familiar with the strong seasonality gold exhibits,
you can get up to speed with one of my gold-bull-seasonals essays.
There are no big buying catalysts in summer, and vacationing traders aren't
all that interested in the markets anyway.

In orbital-mechanics terms, summer starts at the summer solstice in late June
(longest day of the year) and ends at the autumnal equinox in late September.
But in financial-market terms, summer is simply considered to be calendar June,
July, and August. It is these market summers over which the precious metals'
performance needs to be considered. Understanding them will steel you against
PM despair.

But we can't do a straight price comparison across summers, as prevailing
price levels have climbed dramatically throughout gold's secular bull. Back
in 2001 in the early days, gold averaged just $272 on close that summer. But
by last summer (2011), the average gold price had soared 498% higher to $1627.
Obviously a $10 move in 2001 was far more significant than the same move a
decade later.

To make all the precious-metals summers perfectly comparable in percentage
terms across their entire secular bull, we have to individually index them.
So this thread of research indexes each summer for gold, silver, and the flagship
HUI gold-stock index. Each index is set at 100 as of the close on the last
trading day of May. That way any given percentage move looks the same regardless
of base price levels.

Rendering these individual summer indexes on charts is very illuminating.
Each summer from 2001 to 2011 is shown in yellow. While this looks like a mess
of spaghetti on these charts, it reveals general trends and outlying summers.
All 11 of the indexes from these previous summers are then averaged, the red
line. This shows the prevailing trend. Finally our current summer to date is
superimposed in blue.

And we have to start with gold, since its fortunes drive silver and precious-metals
stocks. When gold is strong, the rest of the PM realm leverages its gains.
When gold is weak, its losses are amplified. And in the dead calm of the summer
doldrums, gold tends to drift along listlessly with no wind for its sails.
How can traders expect upside action in silver and PM stocks when gold is lethargically
consolidating?

And lethargically consolidate gold does, as you can see here. The red average
of all the yellow individually-indexed summers from 2001 to 2011 is pretty
flat. For its entire bull, on average this metal has spent summers drifting
from 2% below to 2% above its market-summer starting point at the end of May.
A 2% move either way over a 3-month period is hardly noticeable, essentially
purely sideways.

And before gold's magnificently-bullish anomaly last summer, gold's average
summer performance was indeed dead flat with a downside bias. My last
essay in this series has a
similar chart from before the wild summer-2011 surge. But even that amazing
event didn't alter gold's average summer performance much. Without any major
income-cycle or cultural buying catalysts this time of year, gold just drifts.

As the individually-indexed summers in yellow show, the center mass of this
drift is between 95 and 105 in indexed terms. Gold tends to stay between 5%
below to 5% above its final May close the great majority of the time in June,
July, and August. As you can see above, contrary to all the pessimism today
gold has actually done quite well so far in this summer of 2012. It spent much
of June high in its trading range.

There are outlying summers of course, where one-off factors lead gold to break
out of its usual summer-doldrums consolidation to both the downside and upside.
Back in June 2006, gold plunged in a sharp correction after rocketing to a
major new bull-market high in May. And in August 2008, this metal sold off
sharply as a global bond panic ignited a gargantuan US
dollar surge that hammered gold prices.

There were upside outliers too. Back in July 2008 gold powered higher rapidly
as commodities prices reached a then all-time high before that autumn's once-in-a-lifetime stock
panic obliterated them. And of course last August gold skyrocketed on last
summer's contentious debt-ceiling
debate in the US. With traders believing there was actually a risk of a
default on US Treasuries, safe-haven capital fled to gold.

While these occasional outliers really capture traders' attention, and sometimes
distort their perception of how gold usually performs in the summer, they are
short-lived. After falling below the center-mass drift's support in 2006 and
2008, gold soon returned to trend. And after surging above the usual summer-consolidation
resistance in 2008 and 2011, gold soon fell sharply to reenter the trend channel.

Last year this reversion happened later in September, when gold plunged as
you can see on this chart. The point is gold's seasonal tendency to drift sideways
in the summer doldrums is so darned strong that even rare breakouts never last.
Given its price history for this entire bull in June, July, and August, there
is simply no reason to expect anything more than a boring sideways consolidation
during any summer.

Yet every year, traders wail and gnash their teeth about gold's poor summer
performance. Have they no charts? Is that particular summer the first they've
ever experienced? It is amazing how few traders take the time to consider price
action within historical context. Without that knowledge, they are doomed
to make poor decisions. And selling low near gold's major seasonal low in late
July is a big one.

Nearly every summer, there is widespread capitulation in gold, silver, and
the PM stocks over the next couple weeks. Both speculators and investors
somehow hoping for gold to miraculously buck its decade-old summer trend and
surge are sorely disappointed. So they whine and cry and dump their positions
at exactly the wrong time. Late July marks gold's major
seasonal low ahead of its massive autumn rally.

And you can clearly see that autumn rally accelerating in September on this
chart. After struggling all summer just to maintain its late-May levels, on
average gold has powered 5% higher by late September. So if you can hold on
through the summer doldrums, ignore the ubiquitous bearish psychology and sit
tight, usually you will be richly rewarded in autumn when major seasonal gold-buying
spikes return.

And this is not very hard if you understand these summer doldrums. Because
of this ongoing research we've been doing for many years now, I never expect
anything but drifting from PMs in the summer and advise our subscribers to
do the same. If you can't handle the psychological stress of a sideways grind,
you can simply put your head in the sand and ignore the markets for a few months.
Go on vacation!

While silver has a fanatical following, technically it is merely gold's lapdog.
Throughout its entire secular bull the only times it has surged are when strong
gold prices ignite interest in the precious metals. While there are a handful
of short-lived exceptions, the vast majority of the time silver can't do anything
unless gold is being bid higher fast enough to be exciting. So naturally silver
doesn't fare well in summer either.

Every summer without fail, I get dozens of anguished e-mails from silver enthusiasts
wondering why the white metal can't make any headway. But as this chart shows,
there is no reason to expect it to during the PM summer doldrums. Silver's
average summer performance is even considerably worse than gold's, drifting
between its May close and 5% lower. And silver's autumn rally also starts later
on average.

Silver is a hyper-speculative metal that needs excitement in order
to thrive. Capital only floods in when traders expect a major surge in gold.
And since these are very rare in the summer, silver almost always has a hard
time catching a bid. Note in this chart that the yellow outliers above the
center-mass drift's resistance are much more muted than gold's, while downside
outliers are more common.

Silver tends to drift between 10% above to 10% below its May close in any
given summer, with a definite downside bias as evidenced by the preponderance
of indexed summers and the sub-100 average. While silver indeed has great potential
to soar and leverage gold's gains, June, July, and August is simply not the
time to look for one of its periodic spikes. Silver is dead in the summer,
trapped in the doldrums.

But despite all the silver bearishness out there, silver's action in early
June was its best of this bull as the blue line shows. And despite the
slide since, this metal has still managed to remain above its long-term summer
average on balance. So while you wouldn't know it without this context, silver
is actually exhibiting considerable relative strength this summer. But the
odds argue it will still likely end August close to late May's levels.

Provocatively even though they are doomed to grind sideways in the summers
too, gold stocks fare considerably better than silver this time of year. This
last chart looks at the flagship HUI gold-stock index with the same individually-indexed
methodology to keep all summers perfectly comparable in percentage terms. Realize
that gold stocks actually start rallying on average well before the
market summer ends!

This year the HUI has enjoyed a strong early summer as well, although it knifed
below its average summer performance this week. Like silver, in general it
tends to consolidate between 90 to 110 indexed. It is interesting that this
10% above and 10% below is double gold's 5% above and 5% below for both the
HUI and silver. These subordinate precious-metals plays indeed leverage the
price action in gold itself.

But unlike silver, after getting sucked into gold's major seasonal low in
late July the gold stocks start rallying dramatically on average in August.
In indexed terms between late July and the end of August the HUI tends to
climb from around 96 to 103 or so. This is a sizable rally in percentage
terms, and one speculators and investors definitely want to catch. And it
soon accelerates in autumn with gold's rally.

By late September the HUI tends to approach 110 indexed. So from late July
to late September, gold stocks as a group have advanced nearly 15% on average
throughout this entire secular bull. This is a heck of a rally! And the only
way to ride it is to be a contrarian and fight the crowd. When everyone else
is convinced gold stocks are heading much lower in late July, you have to buy
then or hold on to what you have.

But even with this August rally, the gold stocks don't tend to end the summer
much higher than they started it. Seeing the HUI up 3% on average over a 3-month
span is certainly not enough to generate any excitement. And this is why gold-stock
traders have to steel themselves from the dreadful sentiment wasteland spawned
by the summer doldrums. It is hard not to sell when everyone else loses hope.

Understanding the strong gold
seasonals is essential for all speculators and investors participating
in this wildly-profitable precious-metals secular bull. There are times of
the calendar year where big demand spikes emerge around the world which quickly
push gold higher. But there are other times when demand is flat so gold makes
little progress. And the biggest and longest by far is the summer doldrums.

How on earth can sideways-grinding precious-metals prices demoralize traders
in June, July, and August when this is what they always tend to do during the
market summers? When you don't expect too much, you can't be let down. And
the lackluster historical gold, silver, and HUI price action during the summers
certainly proves that it is irrational to expect anything more than a listless
drift during this long seasonal lull.

At Zeal we are always prepared for the PM summer doldrums. If the gold stocks
enjoyed a strong spring rally, we usually realize the lion's share of our profits
by early June. And unless there is a compelling company-specific reason, we
try not to sell when everyone else is this time of year. When those usual late-July
seasonal lows in gold and the HUI roll around, we often capitalize on the poor
sentiment to buy new positions low ahead of the autumn rally.

And this year is no exception. We have some amazing high-potential gold stocks
on our books right now that are weak because of the usual summer pessimism.
And we will likely add more around late July and early August. So if you are
one of the few remaining contrarians strong enough to buy low when everyone
else is scared, get ready. You can research some of the world's most-promising
gold juniors in our latest fascinating 27-page fundamental
report on our dozen favorites. Buy
yours today!

And instead of being worried all the time about the markets, you can gradually
learn to thrive through our acclaimed weekly and monthly subscription
newsletters. In them I draw on our vast experience, knowledge, wisdom, and
ongoing research to explain what the markets are doing, why, where they are
likely heading, and how to trade them with specific stock trades as opportunities
arise. Subscribe today!

The bottom line is the summer doldrums almost always trap the precious metals
in a listless, demoralizing drift. After over a decade of June, July, and August
grinding, traders really ought to expect nothing more during this seasonal
ebb. While upside breakouts from the usual drifts can happen occasionally,
even they are short-lived. Without major gold-demand spikes, summer simply
has no sizable buying catalysts.

For speculators and investors aware of this tendency, all it takes is a little
patience to weather precious-metals summers. But sadly the majority of traders
refuse to study the markets and advance their knowledge, so every summer their
depression returns anew and they foolishly sell low. Thankfully we can take
advantage of this mistake, and buy low to load up our books ahead of the big
autumn rallies.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
subscribe.